E85 makes original RFS target feasible

Source: By By Sebastien Pouliot and Bruce A. Babcock, Iowa Farmer Today • Posted: Monday, September 28, 2015

The EPA’s justification for proposing to reduce ethanol mandates in the Renewable Fuel Standard is that consumer demand for ethanol is not high enough to meet the original targets.

About 13.7 billion gallons of ethanol can be consumed in E10, which contains 10 percent ethanol. The original mandate for conventional biofuel (widely assumed to be corn ethanol) was supposed to increase to 15 billion gallons in 2016. This would require that 1.3 billion gallons of ethanol would need to be consumed in gasoline-ethanol blends that contain more than 10 percent ethanol.

The two blends that contain more than 10 percent ethanol approved for sale are E15 and E85. The number of stations that sell E15 is currently quite small, whereas almost 3,000 stations sell E85. Thus, EPA focuses on the contribution of potential E85 sales to make its claim that there is insufficient demand for ethanol to support a mandate of 15 billion gallons.

The EPA writes in its proposed rule: “Thus, we believe it is possible for the market to reach volumes perhaps as high as 600 million gallons under favorable pricing conditions.”

Adding this 600 million gallons to 13.7 billion gallons of ethanol consumed in E10 means the EPA believes a maximum of 14.3 billion gallons of ethanol can be consumed in the United States. This is why the EPA proposes to reduce mandates for the non-advanced biofuel from 15 to 14 billion gallons in 2016.

Estimation of the demand for E85 requires data matching various E85 price levels with the corresponding amount of E85 sales.

A rich source of data was provided to us that we used to estimate directly the proportion of U.S. owners of flex vehicles who buy E85 at various price points. The data contains daily station fuel sales and prices of a major Midwest chain of retail gasoline outlets.

We report on how owners of flex vehicles in two metropolitan areas respond to changes in the price of E85 and extrapolate the results to the national level. Perhaps uniquely, this chain’s aggregate market share in these two metro areas was much greater than 90 percent, thus allowing us to estimate the proportion of owners of flex vehicles in the area who chose to switch from E10 to E85 at various price levels.

Using these new direct estimates of consumer demand, we find that owners of current flex vehicles in all U.S. metro areas would consume 250 million gallons of E85 if it was priced at parity on a cost-per-mile basis with E10, and 1 billion gallons of ethanol if E85 were priced to save drivers 23 percent on a cost-per-mile basis.

These estimates assume no new E85 stations are installed. If new stations were installed so drivers in metro areas had the same driving distance to an E85 station, as drivers do in one of our study areas, then more than 1 billion gallons of ethanol would be consumed in E85 in U.S. metro areas if E85 were priced to save FFV drivers 10 percent on a cost-per-mile basis.

These estimates significantly understate total U.S. E85 consumption because consumption in non-metro areas is not included.

Our results show that meeting the original 15 billion gallon RFS ethanol target in 2016 is feasible. The two key conditions needed to meet this consumption level are to allow the market for RINs to work as intended, which will allow the price of E85 to fall to induce consumers to buy the fuel, and for EPA to set a consistent policy signal to industry that they will indeed have to meet this target. A clear and consistent message from EPA is needed to foster investment in fueling stations that will allow enough consumers to access E85.

Comments are from an executive summary of a study by economists at Iowa State University. Sébastien Pouliot is assistant professor of economics and Bruce A. Babcock is professor of economics and Cargill Chair of Energy Economics and is director of the Biobased Industry Center at ISU. The full text of the report is at http://www.card.iastate.edu/publications/dbs/pdffiles/15bp54.pdf